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How to Snag Those 50-Baggers

Why settle for a 15% return when you might earn 5,000% instead -- if you're early?

I've been a stupid and reckless investor in the past, owning too many stocks, not knowing much about them, trading in and out of them too impatiently, and not keeping up with my holdings. It was dumb, and I paid the price -- poor performance.

I'm a lot smarter these days. My portfolio is full of companies I'm rather familiar with and understand much better than my holdings of yore. Some examples: PepsiCo(NYSE:PEP), Wal-Mart(NYSE:WMT), Washington Post Co.(NYSE:WPO), Home Depot(NYSE:HD). I'm also aiming to hang on to them for a long time, unless I lose confidence in them. I expect that this approach will serve me well. After all, these blue chips may be big, but they can still grow. See how they've done in just the past decade:

PepsiCo: 135%, a 2.3-bagger

Wal-Mart: 365%, a 4.7-bagger

Washington Post: 200%, a 3-bagger

Home Depot: 360%, a 4.6-bagger

Not so bad, huh? If this group of holdings merely doubles every decade from now on, I'll have eight times its value in 30 years. $120,000 could become $1 million -- not shabby at all. If it triples each decade, which I admit is something on which to base pipe dreams, not expectations, its value will grow 27-fold.

For many investors, this is enough. Through a broad-market index fund, large-cap mutual fund, or blue chips you've carefully selected on your own, you can meet or beat the market over the long haul, outperforming most Americans.

Holding out for blowoutsStill, I confess that I yearn for much more than doubling every decade. Perhaps this is because I've actually experienced much more. I invested in America Online a little more than a decade ago and watched my investment grow 70-fold. Of course, I didn't sell near the peak, and now those shares, merged with Time Warner(NYSE:TWX), represent merely a 17-bagger. Still, that's a darn good result over 11 years.

While I'm focusing my portfolio these days on proven winners with strong track records and defensible competitive positions, I'm also leaving some room for potential blow-out results by devoting a small portion of my portfolio to some aggressive investments.

How to find 'em earlyQuite obviously, one secret to achieving blow-out results is finding great companies early. If you were thinking about America Online back in the mid-'90s, you would have seen it with a large and growing base of users. Indeed, in 1996 it had around 5 million subscribers, and in 1998, some three times more. Its market capitalization was $5 billion in 1996, rising fivefold in two years. You might have realized that the company had a competitive advantage because of "switching costs" -- in other words, subscribers, once they'd shared their email addresses with lots of friends, were not likely to switch providers and addresses too quickly. You might have decided that the company was worth at least a small investment in case it became wildly successful.

Fool co-founder David Gardner has a certain way he goes about finding tomorrow's rockets for his Motley Fool Rule Breakers newsletter. One thing he looks for is a top dog and first mover in an important, emerging industry. eBay(NASDAQ:EBAY) is a beautiful example here, setting up an online auction site before most people had considered the concept, and thereby grabbing some important competitive advantages. It takes some far-sighted thinking, though, to realize (or at least suspect) that you're looking at an important, emerging industry in such a situation. Many people probably poo-pooed the idea of online auctions ever amounting to much. But those who saw the promise and invested in it were often rewarded. It can help your ultimate investing results to keep an open mind and try out new technologies when possible, so that you're familiar with them and have a better sense of how they'll be met in the market. David also points out that you don't have to invest in such companies' first days. He has often jumped in after a firm has been proving itself for several years.

To appreciate the power of investing early, or even jumping in after a few proven years, consider Microsoft(NASDAQ:MSFT). The table below shows how you'd have fared if you'd invested in the company at various points:

1986: 33,000%, a 331-bagger

1988: 7,300%, a 74-bagger

1991: 2,000%, a 21-bagger

1993: 1,100%, a 12-bagger

1996: 395%, a 4-bagger

2001: 3.7%, a 0-bagger

It's similar with eBay:

Sept. 1998: 2,100%, a 22-bagger

Sept. 1999: 134%, a 2.3-bagger

Sept. 2000: 140%, a 2.4-bagger

Sept. 2001: 261%, a 3.6-bagger

Sept. 2002: 213%, a 3.1-bagger

Sept. 2003: 84%, an almost 2-bagger

Both of these companies are positioned to serve their shareholders well over the years ahead. Both have strong competitive positions -- can you imagine any other operating system becoming half as dominant as Microsoft's? It's not easy. Similarly, even if I gave you a billion dollars to do it with, could you build an online marketplace anywhere near the scale of eBay? It's doubtful. Since eBay is where so many buyers and sellers already are, it's where today's and tomorrow's buyers and sellers want to be.

But will these firms be 20-baggers or 50-baggers over the next decade or two? That's very unlikely, given their current size.

Finding tomorrow's rocketsSo if I'm looking for aggressive growers and I want to find them early, how should I go about doing so? This is where the power of community is valuable. I look to other people. For starters, I read our Rule Breakers newsletter, which is dedicated to finding and introducing companies that are often coming out of left field, breaking rules, creating new ways of doing things, and profiting wildly in the process. David heads up the newsletter, and he's also got a community of like-minded investors working with him, sharing ideas, and pointing out companies.

Since I don't manage to learn about as many new technologies and industries as I'd like, I happily read our Rule Breakers newsletter to get lots of ideas. Is it any good? Well, in about a year and a half, its recommendations are up an average of about 31%, compared to 8% for the S&P 500. Sure, some recommendations are underwater in a significant way, but this is an aggressive investing approach. If companies that might quadruple in short order were low-risk, why would anyone invest in anything else? The potential for flameouts as well as blowouts is why it's best to devote just a portion of your portfolio, at most, to these companies.

I invite you to try the newsletter service for free. A free trial will give you full access to all past issues. You'll be able to read up on all past recommendations and see how they've done.

Investing in young and rapidly growing companies with exciting technologies is a great way to give yourself the chance of snagging a 50-bagger.

Here's to big profits in your future!

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Author

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter... Follow @SelenaMaranjian